Key Takeaways
- Saudi Arabia's residential real estate market is thriving, reflecting strong growth fundamentals and a largely youthful population of over 35 million people.
- Numbers of new residential units and mortgages continue to rise in 2024, in keeping with the country's homeownership target.
- Visa policy reforms and regulatory changes could boost direct foreign investment to the real estate sector.
- However, private real estate developers face significant challenges, including mounting construction costs and competition for financing from other Vision 2030 projects.
Residential real estate prices and rents continue to soar in Saudi Arabia. The cities of Riyadh and Jeddah saw year-on-year sales prices jump by 10% and 5%, respectively, in the first half of 2024, according to property consultancy company JLL's KSA Market Dynamics Report H1 2024. Rental yields also remain high, with year-on-year growth of 9% in Riyadh and 4% in Jeddah. The total number of real estate transactions across all asset classes surged by 38% to just over 106,700 in the first half of 2024, while their total value leapt by 50% to Saudi riyal (SAR) 127.3 billion, according to global real estate company Knight Frank's Saudi Arabia Residential Market Review - Summer 2024.
In S&P Global Ratings' view, Saudi Arabia's economic indicators and population growth will remain strong. We recently revised the outlook on our sovereign ratings on Saudi Arabia to positive from stable to reflect our view of the country's strong outlook for non-oil growth and its economic resilience to volatile oil prices (see "Saudi Arabia Outlook Revised To Positive On Sustained Reform Momentum; 'A/A-1' Ratings Affirmed," published on Sept. 13, 2024).
We expect that demand for residential real estate will remain high, particularly in Riyadh and Jeddah, thanks to robust population growth of 3.3% on average over 2024-2027, partly driven by expat inflows (see chart 1). Saudi Arabia and the rest of the Gulf Cooperation Council region have not seen much impact from the conflict in the Middle East, with debt yields remaining broadly stable and tourism inflows robust. However, if tensions were to escalate, we could see a higher risk premium on debt; weaker tourism, foreign direct investment (FDI), and capital inflows; and more pressure on defense spending (see "Widening Middle East Conflict Poses Risks For Regional Sovereign Ratings," published on Oct. 9, 2024). This, in turn, could prevent Saudi Arabia from achieving some of its Vision 2030 targets.
Chart 1
The Number Of Residential Mortgages Will Continue To Rise
New household formation and declining interest rates will support the demand for residential mortgages. Saudi Arabia will also continue to pursue social liberalization and economic growth, which largely aligns with the demands of the country's large population of young people. As such, we expect new household formation to remain strong as young Saudi families move to the cities for work opportunities.
Vision 2030 targets a 70% homeownership rate by 2030, and the country is on track to achieve this, with the rate hitting 63.7% at the end of 2023, according to the Ministry of Municipal and Rural Affairs. The Saudi government supports the sector through various initiatives. The Ministry of Municipal and Rural Affairs and Housing's Sakani program helps meet mortgage demand from locals, while the Real Estate Development Fund provides interest-free mortgages and mortgage guarantees.
Mortgage lending was up 5.3% in the six months to June 30, 2024, the same rate as last year. We could see growth accelerate even further as interest rates decline. We expect interest rates to decline by 225 basis points by the end of 2025, including the 50 basis-point reduction in September 2024. Lower interest rates are also likely to help banks raise money on the international capital markets and offload some of the mortgages on their balance sheets more quickly. Overall, this could increase banks' lending capacity. We expect lending growth to hover around 9% in 2024-2025, albeit with most of this deriving from the strong pipeline of Vision 2030 projects.
Saudi Real Estate Refinance Co. (SRC) is creating the infrastructure to facilitate mortgage refinancing
SRC is leading the development of Saudi Arabia's real estate finance sector. SRC's mandate is to buy mortgages from banks and other financial institutions to help create space for new lending. SRC's mortgage portfolio amounted to close to SAR28 billion at the end of June 2024, still a minor fraction of the country's SAR639.5 billion mortgage market.
At this stage, SRC still refinances itself by issuing sukuk that the Saudi government guarantees. However, SRC's goal is to create a vibrant market for residential mortgage-backed securities that could attract foreign investment and enhance the banking system's liquidity. Several hurdles remain, however, chief of which is the need for a standardized foreclosure process and a secondary market for foreclosed assets.
Private Real Estate Developers Find The Saudi Market Difficult
Saudi Arabia's residential real estate sector is fraught with challenges, including the growing costs of land, construction, and materials; construction capacity constraints; and competition for financing with other Vision 2030 projects. In addition, first-time issuers may find it hard to tap the developing debt capital market.
Nevertheless, the total stock of residential units is growing steadily. In Riyadh, it now stands at 1.5 million after the delivery of 16,200 units in the first half of 2024. In Jeddah, the number of units stands at 891,000 after the delivery of 11,300 units, as per JLL's market dynamics report for the first half of 2024. We expect the number of units to rise by another 16,000 in both cities in the second half of 2024. Domestic migration to large urban centers will perpetuate the shortage of properties in cities, supporting strong demand.
FDI In Real Estate Remains Marginal
Saudi Arabia plans to attract $100 billion (about SAR375 billion) of FDI under Vision 2030, or almost 6% of the country's GDP. Annual FDI inflows have averaged only about 2% of GDP over the past three years. Inhibitors include the regulations and processes, which, despite the ongoing reforms, can be complex and cumbersome for foreign investors. Increasing foreign investments in real estate, especially residential real estate, could be a relatively simple and fast way of increasing FDI inflows, providing that the government and real estate companies are able to create the right opportunities for international investors. High investments in Dubai's real estate market over the past few years attest to this.
Visa policy reforms and regulatory changes could accelerate FDI to the real estate sector. The Saudi government remains committed to the Vision 2030 goals and we have seen a number of initiatives to support real estate. In January 2024, for instance, we saw the introduction of five new products to the Premium Residency program to stimulate demand from foreign buyers. The various options under the program will drive population growth in the country. However, to secure a real estate-related visa, applicants need to invest SAR4.0 million (about $1.1 million) in real estate, double the United Arab Emirates' investment requirement of UAE dirham (AED) 2.0 million ($0.5 million).
We expect these reforms to continue to evolve and stimulate growth, although domestic considerations, including homeownership targets, will remain the ultimate drivers of the Saudi real estate market.
Related Research
- Is Dubai's Residential Real Estate Market Heading For Correction?, Oct. 28, 2024
- Widening Middle East Conflict Poses Risks For Regional Sovereign Ratings, Oct. 9, 2024
- S&P Global Ratings Revises Its Oil Price Assumptions; North American And Dutch Title Transfer Natural Gas Price Assumptions Unchanged, Oct. 1, 2024
- Saudi Real Estate Refinance Co. Outlook Revised To Positive After Similar Action On Sovereign; 'A-' Rating Affirmed, Sept. 18, 2024
- Saudi Arabia Outlook Revised To Positive On Sustained Reform Momentum; 'A/A-1' Ratings Affirmed, Sept. 13, 2024
- Property Shortage And Government Push Will Fuel Growth For Saudi Developers, May 6, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Sapna Jagtiani, Dubai + 97143727122; sapna.jagtiani@spglobal.com |
| Secondary Contacts: | Zeina Nasreddine, Dubai + 971 4 372 7150; zeina.nasreddine@spglobal.com |
| Zahabia S Gupta, Dubai (971) 4-372-7154; zahabia.gupta@spglobal.com | |
| Research Contributor: | Akansha N Manjrekar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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